Sell puts on great income stocks and you create a steady income strategy.
In uncertain times, investors turn to the safety of cash or bonds. But those who do are settling for miniscule returns and potentially leaving gobs of cash on the table.
You don’t need to settle for low returns (and by “low” I mean anything less than 4%) just because you are concerned about market volatility.
Instead, I recommend you change your thinking about what constitutes an income stock… and about how you trade them.
Great Income Stocks
I recommend you sell puts on great income stocks and particularly a great income stock is one that:
* Is based on an underlying company with strong fundamentals that can sustain above-average growth regardless of changes in the economy;
* Has enough volatility to create outsized put and call premiums; and
* offers put options that sellers can use to create an income stream of between 18% and 25% a year, regardless of what the overall market does.
Think simple, think (relatively low risk) and think large premiums.
Sell puts on these 5 great income stocks.
Income From Streaming Video Wars
The battle for streaming video has started to heat up.
I believe Disney (NYSE: DIS) will be one of the big winners and so will it’s stock.
I expect the new Disney Plus streaming service to become a real competitor to Netflix (NFLX), as it will feature content from Disney, Pixar, Star Wars, Marvel Studios and National Geographic.
And I see the strength of Disney’s streaming services becoming a primary driver of the stock over the next few quarters.
Going forward, Disney will be the No. 3 major streaming service, after Netflix (NFLX) and Amazon (AMZN) Prime. In addition to being a market dominator in streaming services, other major revenue services include the company’s movie studios and theme parks.
In a way Disney reminds me of Apple, which is obviously one of the most successful companies of all time.
Apple has an ecosystem that keeps people inside the brand. The same is true for Disney with kids and ESPN with sports. Apple can market anything simply by introducing it into the ecosystem; ditto for DIS.
The stock is trading with a forward P/E ratio around 16, which is in line with the broader market, but keep in mind that earnings are expected to grow at almost 9% a year for the next five years, which is impressive for a company of Disney’s size.
A final note: Disney’s entertainment services and especially its theme parks benefit from the aspirational shopper that has emerged along with the rebound in the economy. These folks are feeling more at ease about their “personal economy” and willing to spend money on experiences — for their children and for themselves.
The bottom line: I expect the stock to outperform the market for the foreseeable future and a perfect stock to sell puts against for income.
Cash From Natural Gas
Global demand for liquefied natural gas (LNG) is on the rise. Experts are predicting it may overtake oil to become the world’s predominant fuel source.
And the U.S. is becoming an increasingly larger player in the LNG market and could become the leading global supplier within the next few years.
And that’s why I like Houston-based Cheniere Energy (NYSE: LNG), the leading LNG U.S. producer of natural gas.
There are now a handful of other companies with exporting facilities operational or in the works in the United States. LNG plants are expensive to build and require clearing an arduous review process. This creates a high barrier for new entrants.
In short, Cheniere has significant capacity additions planned to meet growing LNG demand over the next several years, and management has proved it can successfully manage the complex approval process, construction and scheduling of new trains.
I also expect Cheniere to benefit from rising domestic natural gas production. This should translate into lower natural gas prices and higher profit margins for Cheniere as the company processes the natural gas into LNG and ships it overseas.
While I used to consider the stock (not the company) “speculative,” I would now categorize it as an “aggressive growth” stock.
This creates the perfect situation for income traders: The company is fundamentally sound while the stock is volatile enough that its options throw off large premiums, allowing option sellers to generate double-digit potential annualized returns.
Plus, the option chains are liquid, making it easy to trade Cheniere Energy week after week.
Rich Biotech Premiums
Many of today’s biotech companies run high in volatility and rich in premiums.
One of my favorite stocks to sell put options on is biopharma powerhouse, Exact Sciences (NASDAQ: EXAS).
Exact Sciences manufactures Cologuard, the only FDA-approved non-invasive screening test for colorectal cancer that can be done at home.
Shares sold off recently following the release of a research report questioning the effectiveness and cost efficacy of Exact’s Cologuard test versus alternatives.
But management hit back immediately, releasing a statement about what they called the “unrealistic assumptions” underpinning the research. They also noted that close to 3 million people have received colorectal cancer screening with Cologuard since the FDA approved it.
“Not only is Cologuard increasing the number of screened Americans, peer reviewed data shows that Cologuard is a cost-effective alternative for people at average risk for colorectal cancer,” the statement said.
Shares have bounced back a bit since then, but this sell-off provides an excellent opportunity for us to sell puts well out of the money.
Increasing Chip Demand Means More Cash
We have traded Micron Technology (NASDAQ: MU) successfully racking up a combined total of $163 per contract.
Micron is one of the largest suppliers of NAND flash memory chips, which go into mobile devices such as phones, tablets and laptops. It is the technology leader in this market, giving the company the ability to charge more for its chips.
Business is good, based on the last earnings announcement, and management forecasts a rebound in memory demand for the rest of the year.
After a rocky 2018, shares of MU are up over 50% year to date on calls for increased chip demand and hopes of an industry-wide recovery. The stock has also garnered some positive coverage from analysts recently, which is helping boost shares.
Recently Longbow Capital upgraded MU to “buy” from “neutral,” citing improving fundamentals in the memory and flash storage chip market.
And earlier, KeyBanc Capital Markets reaffirmed its “overweight” rating, calling for improving demand for memory chips into next year.
Despite the massive run-up in shares, MU remains extremely undervalued. The combination of a dirt-cheap stock with elevated volatility (read: premiums) makes MU an ideal put-selling candidate for the foreseeable future.
Payment Processing Profits
I see the payment-processing sector as one of the most lucrative spaces for income traders looking to sell puts.
And PayPal (NASDAQ: PYPL) is one of my favorite companies and stocks to trade in the payment-processing space.
The company’s focus on e-commerce is one reason for its success. According to a recent article in Barron’s, PayPal is now accepted by 22 million merchants. It has 277 million users and processes 27 million transactions a day. And close to 80% of the top 500 internet retailers use the company’s “Checkout” button.
The stock has been on a tear, nearly tripling in price in the past three years, and it shows no sign of slowing down.
More importantly for us, its options are liquid and throw off terrific premiums to sell puts against.
Sell Put Options
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About The Author
Michael Shulman is a 30 Year Veteran of the financial markets – as a trader, a financial analyst, a financial writer and most recently as an educator.
Mr. Shulman made his first option trade in 1985 – COMPAQ Computer calls – a position that expired worthless. His second trade broke even; the third brought him a year’s salary, a near twenty to one return on his investment. Michael has never looked back. He entered the financial publishing business formally in 2001 as director of research for ChangeWave Research’s institutional research business and as the writer and editor of Hedge Fund Investing.
He has published two books – Sell Short and Made in America – both of which can be found on Amazon.com and is a frequent contributor to reputable financial sites like Seeking Alpha, MSN, MainStreetInvestor, and Traders Reserve.
His trade recommendations in his Options Income Blueprint, Perpetual Income Portfolio Club and Income Masters services maintain a 98% success ratio, meaning his trades produce the expected income 98% of the time. No one’s perfect.